I would change his surname to be the same as yours. I know two families that adopted foster kids (who were considerably older than the child you're talking about) and in both of those cases, the surnames were changed to match that of the adopted families. I think that if you didn't change your potential son's last name, then he would never truly feel like part of the family. Also, since you didn't mention it, I assume you plan on keeping his first and middle name the same, so that should be enough of a connection to his birth mother.

I would make it a 2nd middle name. His name being for example Birth'FN Birth'MN Smith, and your family being Jones, change it to Birth'FN, Birth'MN SmithJones. I wouldn't mash or hyphenate it. That way it doesn't sever or erase his connection to his dead bio-mother but he is manifestly part of your family.

I would absolutely change his surname. To me that is an essential part of bringing a child into a family via adoption. If you feel strongly about it I would keep his current surname as a second middle name.